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“A STUDY OF REVERSE MORTGAGE
SCHEME IN INDIA”
A Project Report Submitted to the
In partial fulfillment of the requirements for the award of the Degree of
MBA
IN
[Finance]
SUBMITTED BY
NAME : ……………………..
ENROLLMENT NO : …………………
UNDER SUPERVISION OF:
………………………
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CERTIFICATE
This is to certify that ………………….., a student of ………………….. has completed
project work on titled “A STUDY OF REVERSE MORTGAGE SCHEME IN
INDIA” under my guidance and supervision.
I certify that this is an original work and has not been copied from any source.
Signature of Guide :____________________________
Name of Project Guide :____________________________
Date :____________________________
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ACKNOWLEDGEMENT
With Candor and Pleasure I take opportunity to express my sincere thanks and obligation
to my esteemed guide …………………. It is because of his indispensable and mature
guidance and co-operation without which it would not have been possible for me to
complete my project.
Finally, I gratefully acknowledge the support, encouragement & patience of my family,
and as always, nothing in my life would be possible without God, Thank You!
NAME
ENROLLMENT NO
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DECLARATION
I hereby declare that this project work titled “A STUDY OF REVERSE MORTGAGE
SCHEME IN INDIA” is my original work and no part of it has been submitted for any
other degree purpose or published in any other from till date.
NAME
ENROLLMENT NO
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TABLE OF CONTENTS
CHAPTER CONTENTS PAGE NO.
Certificate………………………………………………………..2
Acknowledgement………………….………………..……..……3
Declaration……………………………….……………..……….4
Title of the Project……………………………….……...……...6
1. Introduction to topic…………………………………..…………7
� Bank Overview……………………….…..……..........…51
2. Theoretical Perspective……………………………………….54
3. Objective of the study…………………………………….……64
4. Research Methodology……………………………...……...…..65
5. Data Analysis & Interpretation…………………………………68
6. Findings and Recommendation…………………………………80
7. Conclusion and suggestions…………………………………….84
8. Bibliography………………………………….…...…………....86
9. Appendix………………………………………………………87
Questionnaire
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TITLE OF THE PROJECT
“A STUDY OF REVERSE MORTGAGE
SCHEME IN INDIA”
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CHAPTER -1
INTRODUCTION TO TOPIC
Reverse Mortgage in India:
The concept of reverse mortgage, although new in India, is very popular in countries like
the United States. Recently, National Housing Bank (NHB), a subsidiary of the Reserve
Bank of India (RBI), released draft norms of reverse mortgage (the final guidelines are
awaited). Following are some of the key features of the scheme from the draft norms.
1. Reverse Mortgage Loans (RMLs) are to be extended by Primary Lending Institutions
(PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with
NHB. The PLIs reserve their discretion to offer Reverse Mortgage Loans. Prospective
borrowers are advised to consult PLIs regarding the detailed terms of RML as may be
applicable to them.
2. Eligible Borrowers:
• Should be Senior Citizen of India above 60 years of age.
• Married couples will be eligible as joint borrowers for financial assistance. In such
a case, the age criteria for the couple would be at the discretion of the PLI, subject
to at least one of them being above 60 years of age. PLIs may put in place suitable
safeguards keeping into view the inherent longevity risk.
• Should be the owner of a self- acquired, self occupied residential property
(house or flat) located in India, with clear title indicating the prospective
borrower's ownership of the property.
• The residential property should be free from any encumbrances.
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• The residual life of the property should be at least 20 years.
• The prospective borrowers should use that residential property as permanent
primary residence. For the purpose of determining that the residential property is
the permanent primary residence of the borrower, the PLIs may rely on
documentary evidence, other sources supplemented by physical inspections.
3. Determination of Eligible Amount of Loan:
• The amount of loan will depend on market value of residential property, as
assessed by the PLI, age of borrower(s), and prevalent interest rate.
• The table given hereunder may serve as an indicative guide for determining loan
eligibility :
Age Loan as proportion of Assessed Value of Property
60 – 65 40%
66 – 70 50%
71 – 75 55%
Above 75 60%
• The above table is indicative and the PLIs will have the discretion to determine
the eligible quantum of loan reckoning the ‘no negative equity guarantee' being
provided by the PLI. The methodology adopted for determining the quantum of
loan including the detailed tables of calculations, the rate of interest and
assumptions (if any), shall be clearly disclosed to the borrower.
• The PLI may consider ensuring that the equity of the borrower in the residential
property (Equity to Value Ratio - EVR) does not at any time during the tenor of
the loan fall below 10%.
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• The PLIs will need to re-value the property mortgaged to them at intervals that
may be fixed by the PLI depending upon the location of the property, its physical
state etc. Such revaluation may be done at least once every five years; the
quantum of loan may undergo revisions based on such re-valuation of property at
the discretion of the lender.
4. Nature of Payment:
Any or a combination of the following:
• Periodic payments (monthly, quarterly, half-yearly, annual) to be decided
mutually between the PLI and the borrower upfront
• Lump-sum payments in one or more trenches
• Committed Line of Credit, with an availability period agreed upon mutually, to be
drawn down by the borrower
Lump-sum payments may be made conditional and limited to special requirements
such as medical exigencies, home improvement, maintenance, up-gradation,
renovation, extension of residential property etc. The PLIs may be selective in
considering lump-sum payments option and may frame their internal policy
guidelines, particularly the eligibility and end-use criteria. However, these
conditions shall be fully disclosed to potential borrowers upfront.
It is important that nature of payments be decided in advance as part of the RML
covenants. PLI at their discretion may consider providing for options to the
borrower to change.
5. Eligible End use of funds
The loan amount can be used for the following purposes:
• Up gradation, renovation and extension of residential property.
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• For uses associated with home improvement, maintenance/insurance of residential
property
• Medical, emergency expenditure for maintenance of family
• For supplementing pension/other income
• Repayment of an existing loan taken for the residential property to be mortgaged
• Meeting any other genuine need
Use of RML for speculative, trading and business purposes shall not be permitted
6. Period of Loan: Maximum 15 years.
7. Interest Rate: The interest rate (including the periodic rest) to be charged on the RML
to be extended to the borrower(s) may be fixed by PLI in the usual manner based on risk
perception, the loan pricing policy etc. and specified to the prospective borrowers. Fixed
and floating rate of interest may be offered by the PLIs subject to disclosure of the terms
and conditions in a transparent manner, upfront to the borrower.
8. Security:
• The RML shall be secured by way of mortgage of residential property, in a
suitable form, in favour of PLI.
• Commercial property will not be eligible for RML.
9. Valuation of Residential Property:
• The residential property should comply with the local residential land-use and
building bye laws stipulated by local authorities, with duly approved lay-out and
building plans.
• The PLI shall determine the Market Value of the residential property through their
external approved valuer(s). In-house professional valuers may also be used
subject to adequate disclosure of the methodology.
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• The valuation of the residential property is required to be done at such frequency
and intervals as decided by the PLI, which in any case shall be at least once every
five years. The methodology of the revaluation process and the
frequency/schedule of such revaluations shall be clearly specified to the borrowers
upfront.
• PLIs are advised not to reckon expected future increase in property value in
determining the amount of RML. Should the PLIs do so in their best commercial
judgment, they may do so under a well defined Policy approved by their Board
and based on professional advice regarding property prices.
10. Provision for Right to Rescission:
As a customer-friendly gesture and in keeping with international best practices, after the
documents have been executed and loan transaction finalized, Senior Citizen borrowers
may be given up to three business days to cancel the transaction, the “right of rescission,”.
If the loan amount has been disbursed, the entire loan amount will need to be repaid by
the Senior Citizen borrower within this three day period. However, interest for the period
may be waived at the discretion of the PLI.
11. Loan Disbursement by Lender to Borrower:
• The PLI will pay all loan proceeds directly to the borrower, except in cases
pertaining to retirement of existing debt, payments to contractor(s) for the repairs
of borrower's property, or payment of property taxes or hazard insurance
premiums from the borrower's account set aside for the purpose.
• In case the residential property is already mortgaged to any other institution, the
PLI may, at its discretion, consider permitting use of part proceeds of RML to
prepay/repay the existing housing loan. The loan amount will be paid directly to
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that institution to the extent of the loan outstanding with that institution with a
view to release the mortgage.
• Periodicity: The loan will be extended as regular monthly, quarterly, half-yearly
or annual periodic cash advances or as a line of credit to be drawn down in time of
need or in lump sum.
• The PLI will have the discretion to decide the mode of payment of the loan
including fixation of loan tenor, depending on the state and market value of the
property, age of the borrower and other factors. The rationale behind the decision
of mode of payment and fixation of the loan tenor shall be clearly disclosed to the
borrowers.
12. Closing:
The PLIs will provide in writing, a fair and complete package of reverse mortgage
loan material and specimen documents, covering inter-alia, the benefits and
obligations of the product. They may also consider making available a tool kit to
illustrate the potential effect of future house values, interest rates and the capitalization of
interest on the loan.
The closing costs may include the customary and reasonable fees and charges that may be
collected by the PLIs from the borrower. The cost for any item charged to the borrower
shall not normally exceed the cost paid by the lender or charged to the lender by the
provider of such service(s). Such items may include:
• Origination, Appraisal and Inspection Fees. The borrower may be charged pro-
rata origination, appraisal and inspection fees by the PLI /appraiser.
• Verification Charges of external firms
• Title Examination Fees
• Legal Charges/ Fees
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• Stamp Duty and Registration Charges
• Property Survey and Valuation charges
A detailed schedule of all such costs will clearly be specified and provided to the
prospective borrowers upfront by the PLIs.
13. Settlement of Loan
• The loan shall become due and payable only when the last surviving borrower
dies or would like to sell the home, or permanently moves out of the home for
aged care to an institution or to relatives. Typically, a "permanent move" may
generally mean that neither the borrower nor any other co-borrower has lived in
the house continuously for one year or do not intend to live continuously. PLIs
may obtain such documentary evidence as may be deemed appropriate for the
purpose.
• Settlement of loan along with accumulated interest is to be met by the proceeds
received out of Sale of Residential Property.
• The borrower(s) or his/her/their estate shall be provided with the first right to
settle the loan along with accumulated interest, without sale of property.
• A reasonable amount of time, say up to 2 months may be provided when RML
repayment is triggered, for house to be sold.
• The balance surplus (if any) remaining after settlement of the loan with accrued
interest, shall be passed on to the estate of the borrower.
14. Prepayment of Loan by Borrower(s)
• The borrower(s) will have option to prepay the loan at any time during the loan
tenor.
• There will not be any prepayment levy/penalty/charge for such prepayments.
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15. Loan Covenants:
• The borrower(s) will continue to use the residential property as his/her/their
primary residence till he/she/they is/are alive, or permanently move out of the
property, or cease to use the property as permanent primary residence.
• Non-Recourse Guarantee: The PLIs shall ensure that all reverse mortgage loan
products carry a clear and transparent ‘no negative equity' or ‘non-recourse'
guarantee. That is, the Borrower(s) will never owe more than the net realizable
value of their property, provided the terms and conditions of the loan have been
met.
• Loan Agreement: The PLIs shall enter into a detailed loan agreement setting out
therein the salient features of the loan mortgage security and other terms and
conditions, including disbursement and repayment of the loan, in addition to the
usual provisions, which are ordinarily incorporated in a mortgage loan document.
• The loan agreement may also include a provision that the borrower shall not make
any testamentary disposition of the property to be mortgaged and even if it does
so, it would be subject to the mortgage created in favour of the lending institution.
In such a case, the borrower shall make a testamentary disposition of the
mortgaged property in favour of any of his/her relatives, subject to the discharge
of the mortgage debt by such legatee and a statement that the heirs shall not be
entitled to challenge the validity of the mortgage as also the right of the mortgagee
to enforce the mortgage in the event of death of the borrower unless the legal
representative is willing to undertake the responsibility for discharging in full the
amount of loan and accrued interest thereof.
• In addition, the PLI may also consider obtaining a Registered Will from the
borrower stating, inter-alia, that he/she has availed of RML from the PLI on
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security by way of mortgage of the residential property in favour of the PLI,
meaning thereby that in the event of death of the borrower (and co-borrower, if
any), the mortgagee is entitled to enforce the mortgage and recover the loan from
the sale proceeds on enforcement of security of the mortgage. The surplus, if any,
has to be returned to the heirs of the deceased borrower(s).
• The PLIs may consider taking an undertaking from the prospective borrower that
the “Registered Will” given to the PLI is the last “Will”, prepared by him/her at
the time of availment of RML facility as per which the property will vest in
his/her spouse name after his/her demise. The borrower will also undertake not to
make any other ‘Will' during the currency of the loan which shall have any
adverse impact on the rights created by the borrower in the PLI's favour by way of
creation of mortgage on the immoveable property mentioned under the loan
documentation for covering loan to be allowed to his/her spouse and interest
thereon, even after the borrower's death.
• The PLI will ensure that the borrower(s) has insured the property against fire,
earthquake, and other calamities.
• The PLI will ensure that borrower(s) pay all taxes, electricity charges, water
charges and statutory payments.
• The PLIs will ensure that borrower(s) are maintaining the residential property in
good and saleable condition.
• The PLI may reserve the option to pay for insurance premium, taxes or repairs by
reducing the homeowner loan advances and using the difference to meet the
obligations/expenditures.
• The PLI reserves the right to inspect the residential property/premises or arrange
to have the residential property/premises inspected by its representatives any time
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before the loan is repaid and borrower(s) shall render his/her/their cooperation in
respect of such inspections.
16. Title Indemnity/Insurance
• The PLI shall obtain legal opinion for ensuring clarity on the title of the residential
property.
• The PLI shall also endeavor to obtain indemnity on title related risks, as and when
such indemnity products are available in India.
17. FORECLOSURE:
• The loan shall be liable for foreclosure due to occurrence of the following events
of default.
o If the borrower has not stayed in the property for a continuous period of
one year
o If the borrower(s) fail(s) to pay property taxes or maintain and repair the
residential property or fail(s) to keep the home insured, the PLI reserves
the right to insist on repayment of loan by bringing the residential property
to sale and utilizing the sale proceeds to meet the outstanding balance of
principal and interest.
o If borrower(s) declare himself/herself/themselves bankrupt.
o If the residential property so mortgaged to the PLI is donated or abandoned
by the borrower(s).
o If the borrower(s) effect changes in the residential property that affect the
security of the loan for the lender. For example: renting out part or all of
the house; adding a new owner to the house's title; changing the house's
zoning classification; or creating further encumbrance on the property
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either by way taking out new debt against the residential property or
alienating the interest by way of a gift or will.
o Due to perpetration of fraud or misrepresentation by the borrower(s).
o If the government under statutory provisions, seeks to acquiring the
residential property for public use.
o If the government condemns the residential property (for example, for
health or safety reasons).
18. Option for PLI to Adjust Payments:
• The PLI shall have the option to revise the periodic/lump-sum amount at such
frequency or intervals based on revaluation of property, which in any case shall be
at least once every five years.
• Borrower shall be provided with an option to accept such revised terms and
conditions for furtherance of the loan.
• If the Borrower does not accept the revised terms, no further payments will be
effected by the Lender. Interest at the rate agreed before the review will continue
to accrue on the outstanding amount of the loan. The accumulated principal and
interest shall become due and payable.
19. Counseling and Information to Borrowers:
• The PLIs will observe and maintain high standards of conduct in dealing with the
Senior Citizens and their families and treat them with special care.
• The PLIs shall clearly and accurately disclose the terms of the RML without any
ambiguity.
• The PLIs should clearly explain to the prospective borrowers the terms and
conditions of RML, the methodology followed for valuation of the residential
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property, the method of determination of eligible quantum of loan, the frequency
of re-valuation and review of terms and all related aspects of the RML.
• The PLIs may suggest to the Senior Citizens to nominate their ‘personal
representatives' usually a close relative who the PLI can contact in the event of
any potentialities.
• The PLIs may counsel the prospective borrowers about the possible impacts to the
borrowers due to adverse movements in interest rates and property price
fluctuations.
• The PLIs shall clearly specify all the costs to the Borrower(s) that are associated
with the transaction.
• The PLIs shall in no way assert or imply to the borrower(s) that the borrower(s)
is/are obligated to purchase any other product or service offered by the PLI or any
other associated institution in order to obtain a reverse mortgage loan.
• Take reasonable steps to check out the background and procedures of third parties
before accepting referrals of business from them, and refuse to accept referrals
from those that are found unacceptable. Members shall disclose to clients any
third party with a financial interest in the reverse mortgage transaction.
• Overall, the PLIs shall treat the Senior Citizen borrower fairly.
As the old saying goes, “there are no free lunches in life”. In case of reverse mortgage,
there exist a few guidelines, which may not 'appeal' to the house property owner i.e. the
borrower.
1. As per the guidelines, the maximum loan tenure can be 15 years. So, if the borrower
outlives the loan tenure, he can continue to stay in the house. However he will no longer
be eligible for any payments from the bank/HFC.
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2. The bank/HFC shall have the option to revise the periodic/lump sum amount at such
frequency or intervals based on revaluation of property, or at least once every 5 years.
The borrower will be provided the option to accept the revised terms and conditions to
continue the loan. However, if he refuses to accept the revised terms and conditions, no
further payments shall be made by the bank/HFC. Interest at the rate agreed before the
review will continue to accrue on the outstanding loan amount.
3. Since the reverse mortgage can be either at fixed or floating rates, it will be prone to
the interest rate movements. Hence, in the scenario when interest rates are moving
northwards, a floating rate reverse mortgage would add to the borrower's liability.
4. Under the reverse mortgage, the legal heirs of the owner are not entitled to take control
over the mortgaged property up to the extent of the outstanding loan. They are required to
first repay the outstanding loan amount along with the interest to stake a claim on the
property.
5. The banks/HFCs at their discretion may levy penalty or other charges on the
prepayment of loan. So, if the borrower or his heirs wish to prepay the loan amount, they
may have to bear an additional cost.
The most important advantage offered by the reverse mortgage scheme is that despite
mortgaging the house, the house owner retains its ownership, is entitled to live in the
same throughout his lifetime and also has access to a regular income stream, which can
help meet his day-to-day needs. From the banks/HFC's perspective, the mortgage on the
property in its favour ensures that there is no scope for default.
Having said that, individuals who wish to opt for the reverse mortgage scheme would do
well to acquaint themselves with the nitty-gritties of the guidelines. Also, the final
guidelines will aid in providing more clarity to individuals who wish to participate in the
reverse mortgage scheme.
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INDIAN MARKET POTENTIAL
India-specific Characteristics of Relevance to RM
• There are no universal old age social security related benefits. Only about 10% of
the active working population is covered by formal schemes. This would
substantially enlarge the potential target market for RM: ‘house-rich, cash-poor’.
• A much lower proportion of urban households, and by implication, less scope for
RM.
• A much larger proportion of elders co-living with their family members of
subsequent generations and hence less scope for RM
• A possibly stronger bequeath motive, reducing the scope for RM.
• A possibly higher real rate of appreciation of real estate and housing prices,
making RM more attractive to the lender.
• Widespread under valuation of real estate properties to accommodate transactions
involving unaccounted money and evasion of taxes on property and real estate
transactions
• Complexity, variety and location specific variations in types of home ownership.
a. Benami holdings/ ‘Irrevocable power of attorney’
b. Leasehold/ freehold
c. Land use conversion regulations
d. Floor space regulations
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e. Rent/ tenancy controls
f. Disposal of ancestral property
• Absence of competitive suppliers for immediate life annuity products. This, in
turn, is a consequence of
a. Lack of data on old age mortality rates
b. Lack of long-term treasury securities for managing interest rate risks of
annuity providers
• The fledgling nature of the secondary markets for mortgage and securitization of
mortgage loans
• India specific legal and taxation issues
a. License/ Permission required under insurance/ banking regulation for
offering RM
b. Income tax treatment for RM lender and borrower
c. Capital gains on property
d. Reporting and provisioning by the lender as per banking/ insurance
regulation
e. Seniority of RM claims vis-à-vis other secured lenders
f. Status of RM loan in case of insolvency
Old Age Population
Though the Indian population is still comparatively ‘young’, India is also ‘ageing’.
Some demographic projections for India indicate that
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• The number of elderly (>60 yrs) will increase to 113 million by 2016, 179 million
by 2026, and 218 million by 2030. Their share in the total population is projected
to be 8.9 % by 2016 and 13.3% by 2026. The dependency ratio is projected to rise
from 15% as of now to about 40% in the next four decades
• The percentage of >60 in the population of Tamil Nadu and Kerala will reach
about 15% by 2020 itself!
• Life expectancy at age 60, which is around 17 yrs now, will increase to around 20
by 2020
SOURCES OF INCOME SUPPORT FOR THE ELDERLY IN INDIA
As of 1994, the estimated percentage among the elderly, dependent on various sources of
income was as follows:
Source Men Women All elderly
Pensions/Rent 9-10% 5% 7-8%
Work 65% 15% 40%
Transfers
Of which, from
Children
30%
22%
72%
58%
52%
40%
In addition, as per a survey of the National Sample Survey Organization (NSSO) in 1994,
less than 4% of the elderly lived alone. A 1995-96 National Sample Survey of the elderly
reported that about 5% of them lived alone, another 10% lived with their spouses only
and another 5% lived with relatives/ non-relatives, other than their own children. In other
words, co-residence with children and other relatives is predominant.
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However, the following aspects are worrisome:
• The extent and adequacy of support, especially for widows
• Vulnerability of such support to shocks to family income
• As incomes and life expectancy rose in the now developed countries,
simultaneously there was a decline in co-residence rates and intergenerational
support. It may happen in India too
• Strains due to demographic trends seem inevitable: fewer children must support
parents for longer periods of time. In a recent survey covering 30 cities, 70% of
the respondents did not expect their children to take care of them after retirement.
• Job related migration of youth within the country and emigration.
POTENTIAL MARKET SEGMENTS:
Age Group
Above 58 years, assuming 58 is the typical retirement age. Older the individual, more
attractive will be RM. Additional considerations will include the minimum age specified
for preferential treatment as ‘senior citizens’ in matters such as income tax or the recently
introduced Varishta Bima Yojana.
High House Equity
The current monthly annuity payout by LIC under its immediate annuity product Jeevan
Akshay is 844 Rs for a single premium payment of Rs 1 lakh, for a person aged 651. The
annuity will be lower in case of joint life or annuity certain options. If we were to use a
minimum of Rs 5000 as the monthly annuity that makes RM a worthwhile activity, we
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need an RM loan of around Rs 6 lakhs. Assuming a loan to home value ratio of 60%, this
implies a current market value of Rs. 10 lakhs.
Low Current Incomes Relative to Desired Standard of Living
Amongst such households, we are looking for those whose current levels of income are
insufficient to afford their desired standard of living. The salary replacement rates
suggested in the literature, for maintaining the same standard of living after retirement as
before, is around 60%. This implies a pre-retirement take home salary or income (after-
tax) of around Rs 9000-10000 a month. A potential RM borrower would be one who had
such a pre-retirement income but no substantial pension benefits. Therefore, he would
have been employed in the private sector or self-employed.
Long Tenure at Current Home
RM is attractive to a borrower especially when he values continued stay in his current
residence and plans to do so for a long term into the future. This is likely when he has
already stayed in his current home for a relatively longer period- say a minimum of 10
years. Additional indicators for such a desire could be a person currently resident in one’s
home town/ state.
Lack of Other Supports
If such an individual is living alone, as in the case of a widower or widow, RM can make
a substantial contribution to his/ her standard of living. Alternatively, the next generation
may be living far away, either in India or abroad.
No Significant Bequeath Motive
Literature suggests that there is a basic conflict between taking an RM loan and a desire
to bequeath property to one’s heirs. If an elderly homeowner has no children, this
question may not arise. Otherwise, we need to look for attributes indicating a weak
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bequeath motive. For example, in the Indian context, it could mean ‘no sons’. Or it could
be that the entire next generation of the family has migrated to another metro or abroad
with no intention of coming back. They may be much better off than the older generation
and may not value bequests, if any.
Independence and Quality of Life
A potential RM borrower must be an elderly person who values his financial
independence. He must be interested in maintaining his desired quality of life rather than
curtailing consumption for lack of current cash income. This implies he must be mentally
prepared to consider borrowing in old age, let alone through innovative financial products
like RM. This implies certain minimum education and exposure to financial savings/
assets/ markets.
SOURCES OF INDIAN DATA RELEVANT TO RM:
It is very obvious that the target segment for RM is very atypical- ‘the generation past’
rather than the much discussed ‘generation next’. Therefore it is not surprising not much
data of specific relevance to RM is available. Basically we need information on the
following: characteristics of households primarily of the elderly- age profile, current
market value of the house, current monthly incomes and expenditures (including health
care), other financial assets and sources of support, desires for bequests and so on. We
also need reliable projections on mortality rates among the elderly, appreciation rates in
property values in the long run, long-term interest rates etc.
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Housing Stock Owned and Occupied by the Elderly
The Census of 2001 has published a lot of data on housing conditions. However, the
tables published so far do not serve our purpose:
• No valuation of house property has been attempted (though understandably).
Houses have been classified as ‘Good’, ‘Liveable’ or ‘Dilapidated’; ‘owned’ or
‘rented’; size in terms of number of rooms; urban/ rural etc.
• Even though data on the age of the head of the household has been reportedly
collected, such tables have not been published yet.
We came across another recent survey, namely the National Family Health Survey
(NFHS-2), conducted in 1998-99, involving a large national sample of almost 92000
households. This survey’s focus was on the family health status, especially of women and
children. However, according to this survey,
• The age of the head of the household was 60+ in 19.2% (22.4%) of the urban
(rural) households.
• About 12% of men and 43% of women above 50 were widowed.
Unfortunately, this survey does not provide any information on type of home ownership,
value of houses etc.
The latest published study on the elderly in India is by researchers from the Centre for
Development Studies.
• Projections in this study, based on census data till 1991, indicate that urban areas
in the states of Kerala, Tamil Nadu, Goa and the union territory of Chandigarh
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may provide the maximum immediate potential for RM. This is based on
proportion of elderly and literacy levels.
• This study also projects the population of ‘old-old’, i.e., above 70 yrs, the prime
target for an RM loan.
• As reported in this study, the findings of an all India survey of the elderly
conducted by the NSSO in 1986-87 amongst 50000 households are as follows:
a. Amongst the elderly, about 9.52% (12.43%) males and 0.8% (1.43%)
females in urban (rural) areas lived alone.
b. Amongst the elderly, only about 0.70% (0.82%) males and 0.48% (0.63%)
females in urban (rural) areas owned any property.
• As a part of this study, a special “Ageing Survey” was conducted amongst 2253
persons above 60, in the fours states of Kerala, Tamil Nadu, Karnataka and
Orissa. The reported findings of relevance to RM are as follows:
a. There is a striking difference in widowhood across elderly males and
females: 14% amongst males and 68% in females.
b. About 14% of the elderly live in single member or two-member
households.
c. Amongst the elderly, around 90% of the males and 37% of females, were
‘designated’ as head of the household
d. Amongst the elderly designated as heads of households, about 70% of
males and 50% of females actually had ownership of the house.
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e. The findings on health status are as follows:
� As per self assessment, 8.7% of males and 10.6% of females said
they are ‘unhealthy’
[[
� About 35% of both males and females reported some ‘perennial’
health problem. As many as 50% of males and 59% of females
reported to have been bed-ridden at least once during the last one
year.
� About 34% reported vision related, 11% hearing related and 17%
walking related disabilities.
According to a report, appropriate housing for the elderly in India has a high-growth
potential. This report says, “A study conducted by the Technical Committee on
Population, Planning Commission shows that 52 per cent of elderly people in urban areas
are living alone. There is a large segment of active old population who is living alone and
is on the lookout for relaxed lifestyle”.
Old Age Mortality
Reliable data on mortality rates at various ages, especially amongst those above 60 is
absolutely crucial for designing any RM product. Unfortunately, the only published data
available is the one on annuitant lives published by LIC. This is based on the experience
of LIC in their Group annuity schemes with ‘return of capital on death’ option, during the
period 1996-98. This table covered male lives only as data on female lives was
inadequate.
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As this table does not cover experience on individual life annuities and female lives, this
is not a reliable basis for designing an RM product involving significant mortality risks.
More importantly, this cannot be compensated by any study in the near future. This is
also one of the reasons behind the reluctance of private insurance companies in India to
offer immediate life annuity products.
Long term Interest Rates
As discussed earlier, the loan limit or the annuity amount under an RM has to be decided
on the basis of expected long-term interest rates. This represents a commitment by the
lender, even though interest accumulates on a floating rate basis. Therefore, any RM
lender should have access to reliable models for projecting long-term interest rates. The
zero-coupon yield curve released by the NSE on a daily basis is the most widely available
set of rates.
Real Estate/ Housing Appreciation Rates
Unlike interest rates, projections/ assumptions have to be made for specific cities/
localities/ types of housing etc. Though credit rating agencies have recently begun rating
real estate developers, no published geography specific inflation indices of property
values are currently available, to the best of our knowledge.
Legal, Regulatory, Taxation and Transaction Cost Related Issues
The specific product features and required supply-side alliances to offer RM loans have to
be designed with a thorough understanding of the following:
• Entry restrictions under banking and insurance laws
• Capital adequacy, reporting and provisioning by lenders as required by banking/
insurance regulation
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• Legal protection for the RM lender against claims from other secured creditors
and under insolvency laws
• Tax treatment of interest and capital gains in the hands of borrower and lender.
• Protection to the lender to ensure ‘arm’s length’ pricing at the time of disposal of
property
• Location specific real estate related laws and transaction costs, including title
search, property valuation, stamp duties etc.
• Counselling services to potential borrowers, by independent agencies to protect
adverse publicity from legal suits.
• Absence of secondary markets, mortgage backed securitization or insurance for
RM loans
HOW REVERSE MORTGAGE WORKS:
Mr. Patil has retired after what can be called a very fulfilling career with a leading
engineering company. His only daughter is married and well settled in Bangalore. He
owns a large house in Thane -- worth about Rs 80 lakh (Rs 8 million), but he has limited
savings (including PPF and EPF) of Rs 10 lakh (Rs 1 million) to generate any major
income.
He is not expecting any pension either. His worry now is to pay for his modest monthly
expenses of Rs 20,000. His financial assets can at best generate Rs 10,000 per month for
him and the income thus generated will not keep pace with inflation -- meaning that after
five years, when he will require Rs 30,000 per month, while his financial assets will still
generate only Rs 10,000 per month.
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The only option he had earlier been to rent his house and move to a smaller house himself
or to sell his house altogether and invest the proceeds to earn a higher monthly income.
Either way, in his old age, he will be forced to look around for accommodation and keep
on worrying about the rising rents -- not a very happy prospect.
This is where reverse mortgage can be of great value.
Budget 2007 amongst other things gave a green signal to the launch of Reverse Mortgage
-- a widely used instrument in the developed world by the elderly to derive cash flows
from their owned house.
The popularity of the instrument lies in that it converts an illiquid asset -- the house -- into
liquid cash flows for the owner, typically a senior citizen. A more attractive feature is that
senior citizens can continue to live in that house even after drawing cash-flows from it.
Here is how it works. Reverse mortgage as its name indicates operates in a manner
opposite to that of the typical mortgage such as a home loan. In a typical mortgage, we
borrow money in lump-sum right at the beginning and then pay it back over a period of
time. In our payback -- the EMI -- a portion goes towards paying the interest and the
remaining goes towards paying back principal.
All along, we pledge the asset -- namely the home we have bought with the loan -- to the
bank. This asset is the security against which the bank is lending to us. In reverse
mortgage, we pledge a property we already own (with no existing loan outstanding
against it). The bank in turn gives us a series of cash-flows for a fixed tenure. These can
be thought of as reverse EMIs.
There are various forms of reverse mortgage available in the developed countries. The
specific format National Housing Board (the facilitator for housing finance in India) is
promoting is one in which the tenure is 15 years and the owner of the house and his/her
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spouse continue to live in the house till their death -- which can occur later than the tenure
of the reverse mortgage.
Simply put, in case of Mr and Mrs Patil, if they were to opt for reverse mortgage for
tenure of 15 years, they will get annuity (the reverse EMI) from bank for 15 years. After
that, the annuity payments stop.
However, they continue to live in the house. Assume that Mr Patil dies after 17 years.
Mrs Patil can still live in the house till she is alive. After her death, the bank will give
their heirs two options -- settle the overall outstanding loan and retain the house or the
bank will sell the house, use the proceeds to settle the outstanding loan and give the rest
to the heirs.
The bank bears the risk that the outstanding will exceed the market value of property then
and will not ask for the difference from the heirs.
The key question is -- how much of an annuity income can my house generate using
reverse mortgage? The banks have so far not indicated which interest rates they will use
to determine the EMI -- however, we can safely assume that it will not exceed the interest
rates used for loan against property -- which is currently in the region of 12-14%.
Second important variable is the loan to value ratio. Most loans against property work at
60% loan to value ratio -- i.e. by pledging a Rs 1 crore (Rs 10 million) property, you can
get a Rs 60 lakh (Rs 6 million) loan. Some banks are however designing reverse mortgage
products with a higher loan to value ratio -- as much as 90% in some cases.
The specific annuity paid out also depends on the age of the home owner. Higher the age,
higher the annuity everything else being constant. For simplicity consider a 60-year-old
home owner taking reverse mortgage with loan to value ratio of 80% and an interest rate
of 12%.
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The annuity from reverse mortgage works out to be roughly ~Rs 160 per lakh of property
value. Hence for Mr Patil, with a property valued at Rs 80 lakh, the annuity he can expect
will be in the range of Rs 12,800 per month.
Coupled with his income from financial assets, he can continue to live comfortably with
no cutback on lifestyle.
DIFFERENT REVERSE MORTGAGE OFFERINGS IN INDIA:
OFFERING BY SBI:
The State Bank of India (SBI) started offering reverse mortgage products for senior
citizen on October 12, 2007. Joint loans are given if the spouse is alive and is over 58
years of age.
The loan is offered by all branches of SBI from October 12, 2007. The loan is offered at
an interest rate of 10.75% pa and is subject to change at the end of every five years along
with revaluation of security. Every five years, bank may even re-adjust the loan
installments, if it is needed, depending on market conditions and loan status.
The Chief General Manager for Personal Banking (SBI), Mr. Sangeet Shukla told that
there is no upper limit of amount of loan. Also, the maximum period for availing this
benefit is 15 years.
Under this loan, borrowers can be avail payment against the security of their houses on
monthly or quarter installments or either he/she can go for as a lump sum payment at the
beginning.
During their lifetime, the borrower does not have to pay the loan and will continue to stay
in their house. Thereafter, either the legal heirs can repay the loan and redeem the
property but if this option is not exercised, bank will sell the property and liquidate the
loan. Surplus, if any, will be passed on to the legal heirs.
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SBI Reverse Mortgage Loan (RML) –
No. Parameter Details
(1) Objective of the
scheme
To provide a source of additional income for senior citizens of
India who own self-acquired and self-occupied house property
in India.
(2) Eligibility
a. No. of borrowers Single or jointly with spouse in case of a living spouse.
b. Age of first borrower Above 60 years
c. No. of surviving
spouses on the date
of sanction of loan
Should not be more than one. Borrowers will have to give an
undertaking that they will not remarry during the currency of
the loan. If the borrowers choose to remarry, the loan will be
foreclosed.
d. Age of spouse Above 58 years
e. Residence •Borrower should be staying at self-acquired and self owned
house /flat against which loan is being raised, as his
permanent primary residence.
•Mobile/Telephone/Credit Card bills/ Certificate from the
Housing Society where the borrower is staying / Affidavit
made before the Executive Magistrate may be accepted as
proof of residence.
•Borrowers will be required to inform the Bank when they
cease to use this residence as their permanent residence.
f. Title of the Property •Borrowers should have a clear and transferable title in their
names.
•Title verification and search report for a period of 30 years
will be required to be obtained from the Bank’s empanelled
advocate at borrowers’ cost.
g. Title of the property
and number of
borrowers.
Case– Title in single name and loan availed jointly with
spouse.
Title holder should make a Will in favor of the other spouse.
The Will should confirm that this is the last Will and that it
super cedes all earlier Wills, if any. The borrower to undertake
that no fresh Will shall be made during the currency of the
loan.
h. Encumbrances The property should be free from any encumbrances.
However in case of property purchased by availing Home
Loan from SBI and mortgaged to SBI, it will be considered for
RML, subject to closure of the Home Loan account out of the
proceeds of RML.
i. Residual Life of
property
Should be at least 20 years in case of single borrower and 25
years in case of spouse being below 60 years of age.
Certificate from empanelled engineer/architect will be required
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to be obtained for this purpose, in addition to valuation of
property.
(3) Security The RML shall be secured by way of equitable mortgage of
residential property.
(4) Tenor Age of the younger of the borrowers
between 58 and up to 68 years:15 years
Age of the younger of the borrowers
above 68years:10 years
OR till death of the borrower(s), whichever is earlier.
(5) Disbursement By credit to an SB account in the joint names of the borrowers
operated by E or S.
(6) Periodicity of availing
loan
1.Monthly / quarterly payments
2.Lumpsum payment
(7) Quantum of loan The loan amount would be 90% of the value of property. Loan
amount would include interest till maturity. The loan
installments payable to the borrower(s) would be as under for a
loan amount of Rs.1 lac (at interest rate of 10.75% p.a.):
Loan Tenor (years) 10 15
Monthly installments (Rs.) 468 225
Quarterly installments (Rs.) 1,423 687
Lump sum payment (Rs.) 36,022 21,619
The maximum loan amount is kept at Rs.1 Crore (monthly
payment Rs.22,500/- for 15 years) and minimum Rs.3 lacs
(monthly payment Rs.675/- for 15 years).
Example of arriving at the monthly installments:
Property value:Rs.10 lacs
Qualifying loan amount
(90% of property value):Rs.9 lacs
Tenor:15 years
Monthly instalment:Rs. 225 x 9 = Rs.2,025/-
(8) Purpose of Loan Supplementing income, any personal expenses, house repairs,
etc. Loan amount should not be used for speculative, trading
and business purposes.
(9) Repayment/Settlement •The loan shall become due and payable only when the last
surviving borrower dies or opts to sell the home, or
permanently moves out of the home for to an institution or
to relatives. Typically, a "permanent move" may generally
mean that neither the borrower nor any other co-borrower
has lived in the house continuously for one year or do not
intend to live continuously. Bank may obtain such
documentary evidence as may be deemed appropriate for
the purpose.
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•Settlement of loan along with accumulated interest is to be
met by the proceeds received out of sale of residential
property or prepayment by borrowers and his next of kin.
•The borrower(s) or his/her/their legal heirs / estate shall be
provided with the first right to settle the loan along with
accumulated interest, without sale of property.
•A reasonable amount of time, say up to 6 months, may be
provided when RML repayment is triggered, for house to be
sold.
•The balance surplus (if any), remaining after settlement of the
loan with accrued interest and expenses, shall be passed on
to the borrower or the estate of the borrower/legal heirs.
•Borrowers will be required to submit annual life certificates
in the month of November every year. This certificate will
also include clauses regarding marital status, and permanent
residence of the borrowers, in addition to the balance
confirmation as on 31st October of that year.
•List of legal heirs will be obtained at the time of sanction of
loan. With a view to avoiding disputes at the time of
settlement of loan amount by legal heirs, specific
instructions about inheritance of the property and payment
of balance amount, if any, of the sale proceeds after settling
the Bank’s dues, will be required to be part of the
borrowers’ Will.
(10) Foreclosure The loan shall be liable for foreclosure due to occurrence of
the following events of default.
oIf the borrower(s) has/have not stayed in the property for a
continuous period of one year
oIf the borrower(s) fail(s) to pay property taxes or maintain
and repair the residential property or fail(s) to keep the
home insured, the Bank reserves the right to insist on
repayment of loan by bringing the
oResidential property to sale and utilizing the sale proceeds to
meet the outstanding balance of principal and interest.
oIf borrower(s) declare himself/herself/themselves bankrupt.
oIf the residential property so mortgaged to the Bank is
donated or abandoned by the borrower(s).
oIf the borrower(s) effect changes in the residential property
that affect the security of the loan for the lender. For
example: renting out part or all of the house by creating a
tenancy right; adding a new owner to the house's title;
changing the house's zoning classification; or creating
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further encumbrance on the property either by way of taking
out new debt against the residential property or alienating
the interest by way of gift or will.
oDue to perpetration of fraud or misrepresentation by the
borrower(s).
oIf the government under statutory provisions, seeks to
acquire the residential property for public use.
oIf the government condemns the residential property (for
example, for health or safety reasons).
oAny other event such as re-marriage of the borrower(s) etc
which shall have an adverse impact on the loan settlement
prospects.
oBorrowers do not accept the revised terms on revaluation of
property and interest reset at the end of every 5 years from
sanction.
oAny violation of the terms and conditions of RML.
(11) Pre-payment of loan •The borrower(s) will have option to prepay the loan at any
time during the loan tenor.
•There will be no prepayment penalty.
(12) Valuation/Revaluation
of property and option
for the Bank to adjust
payments.
•After the initial valuation to determine the loan amount,
subsequent revaluations will be done at intervals of 5 years.
•The Bank shall have the option to revise the periodic/lump-
sum amount every 5 years along with revaluation. In the
scenario of fall in property prices, the Bank may decide to
revise the amount at any time earlier than 5 years. At every
stage of revision, it should be ensured that the Loan to
Value ratio does not exceed 90% at maturity.
•If the Borrower does not accept the revised terms, no further
payments will be affected by the Bank. Interest at the rate
agreed before the review will continue to accrue on the
outstanding amount of the loan. The accumulated principal
and interest shall become due and payable as mentioned in
clauses 9 and 10.
(13) Interest Rate 10.75% p.a. (Fixed) subject to reset every 5 years.
(14) Processing fee 0.50% of the loan amount, minimum Rs.500/- and maximum
of Rs.10,000/-
(15) Right of Rescission As a customer-friendly gesture and in keeping with
international best practices, after the documents have been
executed and loan transaction finalized, borrowers will have
right of rescission up to seven days to cancel the transaction. If
the loan amount has been disbursed, the entire loan amount
will need to be repaid by the borrower within this period.
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However, interest for the period may be waived. Processing
fee shall not be refunded in such cases.
(16) Insurance and
maintenance of house
property
•The house property will be insured by the borrower at his cost
against fire, earthquake and other calamities.
•The borrower shall ensure to pay all taxes, charges etc.
•Bank reserves the right to pay insurance premium, taxes,
charges etc. by reducing the loan amount to that extent.
•The borrower shall maintain the property in good condition.
(17) Operational issues:
a. Type of facility Non-renewable Overdraft without ledger folio charges.No
cheque book / debit card will be linked to this account.
b. Availability of
product
All branches.
DHFL and Punjab National Bank are the other competitors along with the SBI.
REVERSE MORTGAGE LOAN – “PNB BAGHBAN’ FOR SENIOR CITIZENS
PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based
product for senior citizen titled "PNB Baghban". The product addresses one of the very
important requirements of the society in the fast changing culture of Indian society. The
salient features of the product are given hereunder:
Objective
To address the financial needs of senior citizens owning self occupied property (house),
for leading a decent life.
Eligibility
The residential house/flat owner, who is resident of India, of the age of 60 years& above,
is eligible to raise the loan under this Scheme.
Qualifying/Maximum Amount of Loan/Margin
The qualifying amount of loan will depend on the realizable value of residential property,
after maintaining margin of 20%. The maximum qualifying amount of loan, along with
interest, shall be restricted to Rs.100 lac.
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Rate of Interest
10% p.a. (fixed) subject to re-set clause of five years (as applicable for Housing Loan
Borrowers)
Disbursement/tenor of loan
The loan shall be extended as regular fixed monthly payments during the loan period. i.e.
10-20 years or till the death of the last surviving spouse, whichever is earlier. Depending
on the age of the beneficiary a chart containing the amount of monthly installments (
calculated on ‘Reverse Annuity Mortgage” basis) to be paid to the senior citizen borrower
for different tenors of loan per lac of rupees is as under :-
Qualifying Loan Amount (Rs.1.00 lac)
Tenor (yrs.) 10 11 12 13 14 15 16 17 18 19 20
Monthly
Installment(Rs.)
490 420 360 315 275 240 215 190 170 150 135
Security
The loan shall be secured by way of equitable Mortgage of self acquired / self occupied
Residential Property in favour of the Bank. The property to be revalued every 5 years and
monthly loan installment to be re fixed keeping in view applicable ROI and valuation of
property.
Repayment of Loan
Settlement of loan, along with accumulated interest, to be met by the proceeds received
out of sale of residential property and any surplus to be paid to heirs. The loan will, as
such, become due for recovery and payable six months after death of the last surviving
spouse. However the legal heirs/legatee of the deceased borrowers will be given first
option to settle the loan, along with the accumulated interest, without sale of the property.
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Upfront fee/Documentation Charges
Upfront fee – Amount equivalent to half+ month’s loan installment subject to Maximum
of Rs.15, 000/-.
Documentation Charges/Inspection Charges - Nil
Right of Rescission
After the loan is sanctioned senior citizen borrower(s) shall be given upto 10 days time to
relook into his requirements and if he so wishes to cancel the transaction for any reason
whatsoever.
REVERSE MORTGAGE BY DHFL
India's second-largest private housing finance company, Dewan Housing Finance
Corporation Limited (DHFL), is the first off the block In India with a reverse mortgage
scheme.
The scheme, called 'Saksham' is targeted at retired senior citizens above 60 years of age.
The scheme is similar to a housing loan except that in a home loan the borrower pays a
fixed EMI to the lending institution, while in reverse mortgage the lender pays the
borrower a fixed sum of money on a monthly (or quarterly) basis, the total payment being
equal to the value of the property and the interest on the loaned amount.
After the death of the borrower and the borrower's spouse, the housing company sells the
property to recover the amount paid out along with interest at a rate similar to interest on
housing loans.
The scheme is designed to supplement the monthly income of senior citizens. This
scheme is offered to retired people above the age of 60 years who own property and have
been living in it for at least one year.
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The loan amount is sanctioned based on the:
• Age of the borrower
• Average value of the property
• Rate of interest on the loan
• The payment method chosen by the borrower
The eligibility for a reverse mortgage loan is simple. The borrower should be 60 years of
age, living in self-owned property, which is free of any other encumbrances, and is an
approved construction. The amount loaned would depend on the estimated value of the
property (minus the interest cost) its condition and life. The loan does not apply to
ancestral property.
Saksham allows customers and their spouses to live in the property as long as they are
alive, without the fear of eviction even after the tenure expires. The surplus amount is
then paid to the legal heirs of the borrower. The legal heirs also have the option to re-
possess the property after the demise of both customers and their spouses.
According to Shivkumar Mani, head, marketing, DHFL, "As per the guidelines laid down
by NHB, DHFL is the first company to launch this scheme in India. This unique scheme
is designed to help senior citizens to sustain their lifestyle and also help them maintain
their monthly expenditure without being dependent on anyone. It is a social security
scheme designed to benefit the senior citizens post retirement."
DHFL will first launch Saksham in Mumbai and its adjoining areas before making it
available nationally.
REVERSE MORTGAGE BY UNION BANK
Union Bank of India on 4 April, 2008 launched its "Union Reverse Mortgage Scheme", a
loan product designed exclusively for the benefit of senior citizens. The bank is the fourth
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in the country to launch the scheme through which the loan seeker need not worry about
re-payment and be assured of monthly income; the Bank's Bangalore Zone Field General
Manager L N V Rao. The loan will be available to homeowners who are 60 years of age
or more and can be availed jointly with the spouse, provided he or she is more than 55
years old, he said. Unlike other loan products, there is no income criteria to be met for
availing loan. On the demise of the last surviving owner, the legal heirs have the right to
repay. If they do not wish to do so, the bank will sell the property, set off the loan
outstanding.
The surplus, if any, will be given to legal heirs. The minimum loan amount that can be
availed is Rs one lakh and maximum Rs 50 lakh, Rao said. Seventy per cent of the
assessed value of the building would be the loan amount.
The maximum tenor of a loan under this scheme is 15 years. The loan carries a fixed
interest of 10 per cent per annum.
Typically, for a loan of Rs 10 lakh, the monthly pay off to the owner on ten year loan will
be Rs 4880 and on a 15 year loan, it will be Rs 2410, Rao said. The property is revalued
every five years and adjustments will be made to the monthly payments accordingly, he
said. Rao said the borrower has to comply with certain conditions which include that he
bear the cost of property insured against fire, earthquake and other calamities. If the
borrower ceases to stay in the house which has been mortgaged, the loan will be
cancelled.
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LIC HOUSING TO COMBINE REVERSE MORTGAGE WITH
INSURANCE PLAN:
LIC Housing Finance is looking to combine its reverse mortgage plan with a whole-life
annuity provided by a life insurer. This will allow home owners to use their property to
generate income for life as against for only 15 years as provided under the present reverse
mortgage schemes.
The housing finance arm of the Life Insurance Corporation on Thursday announced the
launch of its reverse mortgage scheme. This product is available across the country for
senior citizens above 60 years. The loan can be availed of either singly or jointly with a
spouse, if the spouse is also above 60.
The shortcoming of most reverse mortgage schemes is that it is available only for 15
years. With the increased life expectancy, most borrowers are expected to outlive the term
of their reverse mortgage. Under present schemes while income from the reverse
mortgage dries up after 15 years, the borrowers end up with the lender having a lien on
their property.
LIC Housing Finance chief executive SK Mitter told ET that the company was in talks
with insurance companies to work out a scheme where home equity could be used to buy
an annuity that provides income for the entire life span of the borrower. “We are working
out how to merge an annuity plan with this product” said Mr Mitter.
The reverse mortgage loan by LICHF will be offered at a fixed interest rate, subject to
reset every five years. Under the scheme, senior citizens can avail of the loan either on a
monthly payment or on a lump sum payment or a combination of both. The property
evaluated for the loan should have at least 20 years of residual life. The maximum loan
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balance shall be 90% of the value of the property and the loan balance will include
interest till maturity.
The amount of the loan will take into consideration the property value, age of the
borrower, and the rate of interest. The loan will become due and payable only when the
last surviving borrower dies or opts to sell the home, or permanently moves out of the
home.
RISKS TO RM LENDERS:
Szymanoski is a good starting point to appreciate the risks faced by an RM lender. These
risks are at the heart of the reluctance of lenders to get into RM lending, in the absence of
public policy support. The principal and unique problem facing the lender is that of
predicting accumulated future loan balances under an RM, at the time of origination. The
uniqueness is because RM is a ‘rising debt’ instrument. Since RM is a non-recourse loan,
the lender has no access to other properties, if any, of the borrower. Even if the collateral
property appreciates in value, it might still be lower than the loan balance at the time of
disposal of the property. There are three basic sources of this risk:
Mortality Risks
This is the risk that an RM borrower lives longer than anticipated. The lender might get
hit both ways: he has to make annuity payments for a longer period; and the eventual
value realized might decline. However, this risk is usually ‘diversifiable’, if the RM
lender has a large pool of such borrowers. Possibility of adverse selection (of
predominance of relatively healthier borrowers) is counterbalanced by the possibility that
even borrowers with poor health may be attracted by RM’s credit line or lump sum
options.
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However, there is no literature on one possible source of systematic risk. Since RM is
projected to substantially improve the monthly income and/ or liquid funds of the RM
borrowers, would it not itself result in a systematically higher life expectancy amongst
them than otherwise? Perhaps this lacuna is due to the relatively short experience with
RM so far.
Interest Rate Risks
Given that the typical RM borrower is elderly and is looking for predictable sources of
income/ liquidity, RM loans promise a fixed monthly payment / lump sum / credit line
entitlement. However, for the lender, this is a long-term commitment with significant
interest rate risks.
While fixing the above, the lender has to account for a risk premium and thus can offer
only a conservative deal to the borrower. This interest rate risk is not fully diversifiable
within the RM portfolio.
Most of the RM loans accumulate interest on a floating rate basis to minimize interest rate
risks to the lender. However, since there are no actual periodic interest payments from the
borrower, these can be realized only at the time of disposal of the house, if at all.
Property Market Risk
This risk may be partly diversifiable by geographical diversification of RM loans.
However, property values may be a non-stationary time series.
Others have pointed out additional aspects of these risks:
• RM can be considered as a package loan with a ‘crossover’ put option to the
borrower to sell his house at the accumulated value of the RM loan at the
(uncertain) time of repayment. If this option can be valued, it can be suitably
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priced and sold in the market. However, unlike in the case of forward mortgages,
markets for resale, securitization and derivatives based on RMs are non-existent or
non-competitive. Small market size and predominance of government backed RM
insurance may dissuade potential entrants. This impedes the flow of funds to
finance RM loans.
• For the lender, both the interest and any shared appreciation component added to
the loan balance are taxable as current income even though there is no cash
inflow.
• RM loans found takers amongst lenders only after the availability of default
insurance under the HECM programme. Even then, in most of the RM loans,
interest accumulates at a floating rate linked to one-year treasury rates. Boehm
and Ehrhardt illustrate why. Basically they demonstrate that
� A fixed interest rate RM carries an interest rate risk several orders of
magnitude higher than a conventional coupon bond or regular mortgage. It
could be especially high at origination (as many as 100 times) and
continues to be higher throughout.
� The small initial investment under an RM is very deceptive. RM creates
very large off-balance sheet liabilities, if market rates rise above the rate
assumed under RM.
� If interest rate risk is also incorporated into capital adequacy norms, this
will mean disproportionate (to current asset value) additional capital
commitments to support RM lending
� This is because the typically small RM loan value at origination is
essentially the difference between the value of a relatively long duration
asset (loan repayment) and a relatively shorter duration annuity liability.
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� Compared to a fixed interest RM that is non-callable by the borrower, a
callable RM carries very high risks for the lender. The fact that most of the
RMs accumulate at floating rates and that fresh RM loans involve
significant upfront costs mitigate this risk considerably .
Moral Hazard Risk
Once an RM loan is taken, the homeowners may have no incentive to maintain the house
so as to preserve or enhance market value. This might be especially true when the loan
balance is more or less sure to cross the sale value. Since the benefit would accrue mainly
to the lenders and the cost borne by the homeowner, it is perhaps not sensible to assume
otherwise. Miceli and Sirmans model this risk. They conclude that in a competitive
market, the lenders will respond by either reducing the loan amount or by charging a risk
premium in interest or both. However this fear of moral hazard in maintenance does not
square with the findings of Leviton discussed earlier, on the intensity of the attachment of
the elderly to their homes.
The more important point is that some time during the tenure of an RM, an elderly
borrower may simply be physically incapable of maintaining the home as per loan
requirements. Though the RM loan contract provides for foreclosure under such
conditions, this seems to be impractical and sure to result in litigation and bad publicity
for the lender. These problems have begun to crop up already.
Shiller and Weiss broaden the scope in two dimensions:
• In addition to RM, a range of home equity conversion products
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• Beyond mere maintenance, they consider incentives to improve home values, to
drive a hard bargain at the time of sale, and cheat the lender at the time of
appraisal before granting the loan (adverse selection) or through disguised or
complex sale arrangements to achieve undeclared gains at the cost of the lender.
They advice caution:
• Experience to date may not be a reliable guide to the future as most of the
experimental schemes are in their infancy
• Losses due to moral hazard may take many years to develop
• Competitive pressures for achieving volumes in future may increase this risk
Liquidity Risks
In RM loans where the borrower draws down on his loan through a credit line, there is a
risk of sudden withdrawals.
CONSIDERATIONS IN PRODUCT DESIGN:
In this section, we focus on aspects of product design likely to be attractive from the
perspective of a potential RM customer and a lender.
Customer Perspective
• Empathetic counseling from professionally competent and independent
counselors- NGOs like Help Age, Dignity Foundation, Indian Association of
Retired Persons (IARP) etc., may be interested in providing such services
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• Ratio of RM Loan limit to current market value of property: This will be a
function of borrower’s age, projected long term interest rates and property
appreciation rates
• Flexibility in draw downs: The line of credit with interest credit for unutilized
portion is the most popular choice in the U.S context. The same might be true in
India too. Cash may be withdrawn as and when needed, especially large amounts
to meet medical and other emergencies, in contrast to a regular monthly amount.
However this is vulnerable to myopic withdrawals or under pressure from
relatives.
• Minimum possible RM closure costs
• Clarity in borrower’s responsibility for property maintenance and paying property
taxes, insurance etc. Strong legal protection against foreclosure and/ or forcible
eviction based on fine print may be desirable. Alternatively, the RM lender
should be willing to take over such a responsibility against deduction from RM
loan limit/ annuity.
• Clarity in tax treatment of RM receipts, accrued interest, capital gains etc.
• Option to refinance in case interest rates decline substantially.
• Protection against lender defaults- though not very critical.
Lender Perspective
The major concern is with respect to the risks of mortality (longevity), interest rates and
property appreciation rates. There is no simple way to explore these except through
financial modeling. Some alternatives for limiting risks in the learning phase have been
suggested:
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• Purchasing a life annuity through an insurance tie-up so that a part of the mortality
risk is transferred to the insurer with the necessary core competence. Their
expertise may also be used to decide on the lump sum RM loan.
• Based on the U.S experience so far, it seems better for the lender to assume
responsibility for property maintenance/ taxes against deduction from RM loan
limits/ annuity payments.
• Though insurance against default risk is unlikely in India, an RM lender has to
charge an equivalent additional interest spread of 2-2.5%, if not more, as a default
risk premium
• It seems worthwhile to explore and lobby for concessional refinance for RM loans
from agencies like the National Housing Bank and for lower RM related
transaction taxes.
• Given the requirement of property market related expertise at the micro-level, it
might be worthwhile to focus on only one or two cities in the initial phase.
• There might be a need for tie-ups with agencies for various services- property
valuation, title search, property maintenance and so on.
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BANK OVERVIEW:
ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion (US$
91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$ 1,155 million)
for the year ended March 31, 2011. The Bank has a network of 2,752 branches and about
9,225 ATMs in India, and has a presence in 19 countries, including India.
ICICI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialised
subsidiaries in the areas of investment banking, life and non-life insurance, venture
capital and asset management.
The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches
in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai
International Finance Centre and representative offices in United Arab Emirates, China,
South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has
established branches in Belgium and Germany.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the
National Stock Exchange of India Limited and its American Depositary Receipts (ADRs)
are listed on the New York Stock Exchange (NYSE).
Board of Directors:
Mr. K. V. Kamath, Chairman
Mr. Sridar Iyengar
Dr. Swati Piramal
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Mr. Homi R. Khusrokhan
Mr. Arvind Kumar
Mr. M.S. Ramachandran
Dr. Tushaar Shah
Mr. V. Sridar
Ms. Chanda Kochhar,
Managing Director & CEO
Mr. N. S. Kannan,
Executive Director & CFO
Mr. K. Ramkumar,
Executive Director
Mr. Rajiv Sabharwal,
Executive Director
AWARDS:
• ICICI Bank won the "Best Bond House (India) 2011", by IFR Asia
• ICICI Bank awarded the Best Bank (India) by Global Finance
• ICICI Bank won the "Century International Quality Era Award" at Geneva. The
award recognizes commitment towards Quality, Excellence, Customer
Satisfaction, Leadership and Strategic Planning as established in the QC 100
model of Total Quality Management (TQM).
• For the second year in a row, Ms. Chanda Kochhar, Managing Director & CEO, is
in the Power List 2012 of 25 most influential women professional in India, by
India Today.
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• Ms. Chanda Kochhar, Managing Director & CEO, is amongst the nine Indian
women to be named in the Forbes magazine's inaugural 'Asia Power
Businesswomen list'
• Mr. N.S.Kannan, Executive Director & CFO, received the "Best CFO", in the
Banking / Financial Services category by CNBC - TV 18.
• ICICI Bank was recognized for the first Credit Default Swap (CDS) deal in India
at the Fimmda annual conference in Kuala Lumpur.
• Ms. Chanda Kochhar, Managing Director & CEO was awarded the "CNBC Asia
India Business Leader Of The Year Award". She also received the "CNBC Asia's
CSR Award 2011
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CHAPTER -2
THEORETICAL PERSPECTIVE
I have reviewed the under noted literatures to get the insight of the scheme. I have gone
through the various books, journals, magazines and websites. Some of the data from
which will be quoted in the project. The book “Reverse Mortgages: Cash for the rest of
your life” has been written by Mr. Greg Patti, which was published in 2005. In his book
Mr. Patti has explained how Reverse Mortgage Scheme spread in western world as
“Seniors” want live their life comfortably without losing their hard earned and
constructed homes.
In “Modern Banking Theory & Practices” D. Muralidharan, the author of the book has
clearly stated that what is the present aspect and future prospect of the reverse mortgage
in India. He has stressed on the point that why the reverse mortgage is not so popular in
India as in western countries.
To gather the various statistical data, I have referred magazines like Pratiyogita Darpan,
June, 2008 edition, in which the future aspect of the scheme is explained.
Numerous websites have also been referred for up to date progress and data collection
regarding the scheme. Especially the www.wikipedia.org has played an imminent role in
defining the basic term related to the reverse mortgage and therefore enabling me to
understand the pros and cons of the same.
I have also referred my own bank’s wave site i.e. www.allahabadbank.com for the
purpose of comparative study with other lending institutions like State Bank of India, Life
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Insurance Corporation of India and Others. Wave sites like www.mint.com,
www.bankbazar.com etc has helped a lot to find out the current on going scenario and
present position of reverse mortgage in India.
Further, journals like India Insurance Report Series, Industrial Economics Volume 40
have been studied in depth to gather the data related to the scheme.
Thomas J. Miceli 2003: This paper develops a theoretical model of the problem of
maintenance risk in reverse mortgages (RMs) and home equity conversion instruments
generally. By maintenance risk, we refer to the incentive homeowners will have to reduce
maintenance expenditures as their equity in the house falls during the term of the RM.
The underlying reason for this tendency is the limited liability feature of RMs, given that
a borrower's obligation to the lender at. maturity is limited to the value of the house.
The results of the model show that lenders will respond to this problem either by limiting
the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging
an interest rate premium to cover the expected cost of default. Unfortunately, there do not
exist data to test the importance of maintenance risk as a possible limitation on the extent
of the RM market.
Nandinee K. Kutty 2009: this paper investigates the scope for alleviating poverty among
elderly home-owners in the US by means of reverse mortgages. A reverse mortgage is a
loan secured against the home equity owned by the borrower. This loan does not require
monthly repayment and the elderly borrower is allowed to use the home as a principal
residence for as long as she wishes. We compute monthly payments that can be obtained
by elderly home-owners under a reverse mortgage by simulating the tenure plan of the
Home Equity Conversion Mortgage (HECM) reverse mortgage product which is
sponsored by the US Department of Housing and Urban Development. This study utilises
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data from the National File of the American Housing Survey of 1991. We estimate that
621 820 elderly home-owners in poverty could be raised above the poverty line if they
obtained a reverse mortgage under the HECM tenure plan. These households constitute
29 per cent of all poor elderly home-owners. There appears to be considerable scope for
alleviating poverty among elderly home-owners through reverse mortgages. We estimate
that the poverty rate of elderly households in occupied units (both renters and owners) can
be reduced by three percentage points (from 17 per cent to 14 per cent) by means of
reverse mortgages. It is estimated that if home-owners in poverty had obtained reverse
mortgages in 1991, the poverty rate for all elderly persons that year, 12.4 per cent, would
have reduced by 2.4 percentage points to 10 per cent.
According to Bradford Case1, Ann B. Schnare 2003: This paper describes and
evaluates the Home Equity Conversion Mortgage (HECM) insurance demonstration,
designed to encourage the development of private reverse mortgage programs by insuring
lenders against the risks associated with new mortgage lending programs and with reverse
mortgages in particular. The paper evaluates demand for the program by analyzing the
attributes of participating borrowers, their properties and the types of payment options
chosen. It also presents several observations regarding participation by the financial
community in the HECM demonstration, required counseling and legal and regulatory
issues that may hamper the growth and development of reverse mortgage programs in
general.
The findings suggest strong demand for reverse mortgages among “house-rich, cash-
poor” elderly homeowners, either to supplement inadequate current incomes or to provide
a reserve against unexpected lump-sum expenses. The flexible design of the HECM
program addresses a wide variety of borrower financial needs, even though it imposes
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higher costs on lenders and servicers. The continued growth of the program, however, is
hindered by a shortage of qualified housing counselors in some areas, as well as by a
variety of legal and regulatory barriers.
Accoring to Thomas Davidoff & Gerd Welke in 2004: This paper explains why
selection in the US reverse mortgage market to date has been advantageous rather than
adverse. Reverse mortgages let "house rich, cash poor" older homeowners transfer wealth
from the wealthy period after their home is sold to the impoverished period before. Near
absence of demand seems to contradict life cycle consumption theory and has been
blamed in part on large up-front fees. These fees, in turn, are justified by adverse
selection and moral hazard concerns related to length of stay in the home. In fact, reverse
mortgage loan histories and the American Housing Survey reveal that single women who
are reverse mortgage borrowers depart from their homes at a rate almost 50 percent
greater than observably similar non-participating homeowners. This surprising fact
appears to arise from the phenomenon that the types of people who wish to take equity
out of their homes through reverse mortgage borrowing are also likely to take out the
remaining home equity by selling their homes. This mechanism is similar to the
heterogeneity in risk aversion proposed by de Meza and Webb (2001) to rationalize
advantageous selection in insurance markets. Further results suggest that future declines
in price appreciation may generate sufficient moral hazard as to undermine the
advantageous selection seen to date.
According to Sally R. Merrill1, Meryl Finkel & Nandinee K. Kutty in 2003:
A variety of reverse mortgage loan programs have been available to elderly households
for over a decade. The number of unrestricted reverse mortgage loans issued by the
private sector has been quite small. About 12,000 loans have been issued through mid-
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1992. Some researchers take this to mean that the size of the potential market for reverse
mortgages is also quite small. Other researchers claim that current low levels of activity
reflect supply and demand problems, but that the potential market is in fact quite large.
This paper uses American Housing Survey (AHS) data to estimate the potential size of
the market for unrestricted reverse mortgages. The 1989 national AHS shows that there
are over twelve million elderly homeowners (age 62 and over) who own their homes free
and clear. Depending on their income, age and the level of home equity, the group of
households most likely to benefit from reverse annuity mortgages is considerably smaller.
As one approach to defining a lower bound of the estimate of potential beneficiaries from
reverse mortgages, we count the number of homeowners in a prime group consisting of
the older elderly, aged 70 or above, with an annual income of $30,000 or less, with home
equity between $100,000 and $200,000, who have lived in their homes for over ten years.
We estimate that there are about 800,000 elderly households in this prime group. For such
households, reverse mortgage payments could represent a substantial percentage increase
in income; other definitions of target groups can also be explored using the tables
provided.
The paper uses the 1985 through 1988 AHS Standard Metropolitan Statistical Area
(SMSA) surveys to identify areas that have a large number of elderly homeowners in the
prime target group, and in which these homeowners represent a large fraction of the
elderly homeowner population. These locations are likely targets for introduction of
reverse mortgage products because any campaign can be targeted towards a high
concentration of likely eligible beneficiaries.
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According to Christopher J. Mayer, Katerina V. Simons in 2003:
Housing wealth constitutes most of the non-pension wealth of the elderly population. This
study analyzes the potential of reverse mortgages to increase the income and liquid
wealth of the elderly by identifying households with relatively high levels of housing
equity. Because this article looks at the whole distribution of elderly households and
considers debt as well as income, it finds a larger potential market for reverse mortgages
than previous studies.
Calculations from the 1990 Survey of Income and Program Participation and Census
population estimates show that over six million homeowners in the United States could
increase their effective monthly income by at least 20% by using a reverse mortgage. Of
these, more than 1.3 million have no children. Furthermore, a reverse mortgage would
allow over 1.4 million poor elderly persons to raise their incomes above the poverty line.
Edward J. Szymanoski Jr. in 2003: This article analyzes the risks involved with reverse
mortgage insurance and explains the pricing model developed for the Home Equity
Conversion Mortgage (HECM) demonstration. The paper demonstrates how borrower
longevity, interest rates and property value changes all affect pricing, and why the HECM
model focuses on property value as the primary source of uncertainty. It goes on to
explain why a random walk specification was chosen to forecast property values, and how
the principal limit factors, which determine cash payments to borrowers in the HECM
program, are calculated.
According to Kee-Lee Choua, Nelson W.S. Chow in 2005:
The reverse mortgage plan has been proposed as a viable solution to improve or maintain
the economic status of older adults who are “house-rich but cash-poor”. The objectives of
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the current study were: (1) to find out the percentages of the middle-aged (aged between
45 and 59) homeowners in Hong Kong who would consider applying for the reverse
mortgage plan when they retired or became older and (2) to identify socio-demographic,
economic and health-related characteristics that were significantly related to the
willingness to consider applying for the reverse mortgage plan. In a random sample of
1867 Hong Kong middle-aged adults, 663 of them owned their self-occupied flats.
Approximately, 11%±2.4% (p<0.05) of these home-owners definitely or probably would
consider to apply for such plan if it was available in Hong Kong local banks. Moreover,
using logistic regression analyses, we found that childlessness and possession of stocks,
bonds or funds were positively related to the willingness to consider applying for the plan
and the amount of financial asset (excluding their self-occupied properties) was
negatively associated with that willingness. Results suggest that the reverse mortgage
may be another feasible option to secure the retirement income for the next cohort of
older adults in the coming two decades
Tax Treatment of Reverse Mortgage Loan
Though the receipts of the Reverse Mortgage Loan in various countries are tax free, the
treatment of the same in India is still under consideration along with the concept itself.
Although a handful of Financial Institutions have initiated the facility of Reverse
Mortgage in India, the National Housing Bank is endeavoring towards crystallizing its
concept and scheme. Reverse Mortgage was introduced for the first time by the Hon’ble
Finance Minister while presenting Budget for 2007-08. The modalities in relation to
taxability of the payments to be received under the Reverse Mortgage are yet to be
considered and have to be worked upon. However, the thrust of the considerations and
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deliberations shall focus on imposing no burden of tax on the borrower(s) as the nature of
the Reverse Mortgage Loan is on the lines of a welfare loan for the Senior Citizens.
A Reverse Mortgage is an excellent financial planning tool for older homeowners to
supplement their retirement income, pay for healthcare costs, make home improvements,
buy a second home, and/or establish an emergency fund, while staying in their home. The
Reverse Mortgage Loan may be used anyway the borrower(s) wishes as it is his money
and his house. So modern wisdom rightfully says, one can have the cake and eat it too.
A SWOT ANALYSIS ON REVERSE MORTGAGE LOANS:
The draft operational guidelines circulated by National Housing Bank (NHB), lays down
the various aspects of reverse mortgage loans for senior citizens. Under this scheme, any
senior citizen owning unencumbered residential property in India can mortgage such
property for a loan, to tide over expenses in their twilight years. Here's a SWOT analysis
of the same.
Strengths
The senior citizens are entitled to regular cash flows at their choice - monthly, quarterly,
half yearly and annually.
The loan is given without any income criteria at an age where normal loans are not
available.
No loan servicing or repayment required during the lifetime of borrower and spouse.
If the borrower dies during the period, the spouse will continue to get the loan amount for
15 years.
Tax treatment of a RML will be as loan, not income, so no tax will be payable on the
regular cash flows.
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The borrower and their spouse can continue to stay in the house till both die.
Heirs of the borrower will be entitled to get the surplus of sale value of the property.
Borrower/heir can get mortgage released by paying loan with interest without having to
sell property at any time. Prepayment of loan is allowed.
NHB to guarantee obligation of banks/housing finance companies to pay the committed
loan amount as regular sums over a period of time.
Reassessment of property value will be done periodically, or at least once every 5 years.
Borrower can cancel the mortgage within three days of approval/disbursement, subject to
return of loan amount.
Weaknesses
This loan product has a maximum tenure of only 15 years. If the borrower outlives this
period, the regular cash flows will stop.
Basis of property valuation is not clear.
Requirement of clear title to property in the name of the borrower to get the loan.
Three days period to cancel loan is too less. Should be at least 15 days to go through the
fine print.
Various fees to be added to borrowers liability, which can be quite substantial.
Opportunities
Partial substitute for a social security scheme for senior citizens.
Longevity increasing with nuclear families. However, medical expenses and cost of living
going up, increasing the need for additional income in old age.
Most Indians have strong preference for own home. Therefore many eligible citizens may
opt for the scheme.
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Quantum of loan can increase favourably for borrower on revaluation of property.
Threats
Property valuations are ambiguous.
There is a non-recourse guarantee, which means that loan plus interest should never
exceed realisable value of property. In case of fall in property value or loan with interest
exceeding assessed property value, banks may resort to strong-arm tactics to force the
borrowers to move out, if they live too long after the loan period is over.
Rate of interest is at the discretion of lender. Any increase in the rate, if floating, will
increase the burden of the borrower. Lender has discretion to raise loan amount on
revaluation. However, if it does not do so, borrower doesn't get loan according to proper
value of property. Lender has right to foreclose loan by forcing sale of property if
borrower doesn't pay for insurance, property taxes or maintain and repair house. Can lead
to further harassment.
This product seems very good in theory and can be of great help to senior citizens who
can live in their own houses and yet avail of a loan against it. However, the norms need to
be fine-tuned and made watertight so that these borrowers are not harassed or short-
changed in their old age.
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CHAPTER -3
OBJECTIVES OF THE STUDY
The objective decides where we want to go, what we want to achieve and what is our goal
or destination. The objective of “Study of Reverse Mortgage in India” is to -
1. Analyze the future prospects of this lending scheme in India.
2. Find out the Risks associated with it in current scenario (Recovery after global
economic meltdown).
3. To find out the welfare gain to senior citizens from Reverse Mortgage Scheme.
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CHAPTER -4
RESEARCH METHODOLOGY
Research methodology in a way is a written game plan for conducting research. Research
methodology has many dimensions. It includes not only the research methods but also
considers the logic behind the methods used in the context of the study and complains
why only a particular method of technique has been used. The basic task of research is to
generate accurate information for use in decision making. Research can be defined as the
systematic and objective process of gathering, recording and analyzing data for aid in
making business decisions.
As the project involves analyzing of financial structure, the research is exploratory in
nature, covering financial parameters and come of the important ratios to carry out
research.
DATA COLLECTION METHOD:
The data will be collected using both by primary data collection methods as well as
secondary sources.
(i) PRIMARY DATA- Most of the information will be gathered through primary
sources. The methods that will be used to collect primary data are books, research,
newspapers, wave sites etc.
Books: -
• Reverse Mortgage Essentials by Steve Lowsons
• Reverse Mortgage and Linked Securities by Vishal Bhuyan
• Modern Banking Theory & Practice by D. Muralidharan
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News Papers: -
• Business Standard, Lucknow and Meerut Edition
• Economic Times, Meerut Edition
Magazines: -
• India Insurance Report Series
• Industrial Economics Volume 40
Web Sites: -
• www.allahabadbank.com
• www.statebankofindia.com
• www.pnb.co.in
• www.lic.co.in
(ii) SECONDARY DATA – Interviews, questioners, fill ups, different nationalized
banks, borrowers, financial consultants etc. Secondary data of this project on Reverse
Mortgage will be collected from -
• Interviews from different categories of target group.
• Questionnaires will be arranged to get the data.
• Fill ups
• Different nationalized banks
• Borrowers
• Financial consultants
TIME FRAME OF THE DATA COLLECTION:
2 Months
METHOD OF SAMPLING:
The technique used for conducting the study was Convenience Sampling Technique as
sample of respondents was chosen according to convenience.
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STASTICAL TOOLS:
The tools used in this study were MS-EXCEL, MS-WORD. MS-EXCEL was used to
prepare pie- charts and graphs. MS-WORD was used to prepare or write the whole
project report.
REPORT WRITING AND PRESENTATION
Report Encompasses – Charts, diagrams
METHOD YOU WILL USE TO CLASSIFY DATA:
Data Analysis & Interpretation – Classification & tabulation transforms the raw data
collected through questionnaire in to useful information by organizing and compiling the
bits of data contained in each questionnaire i.e., observation and responses are converted
in to understandable and orderly statistics are used to organize and analyze the data.
♦ Simple tabulation of data using tally marks.
♦ Calculating the percentage of the responses.
♦ Formula used = (name of responses / total responses) * 100
NUMBER OF RESPONDENTS
Total samples of 50-75 respondents were contacted who responded to the questionnaires.
AREA OF STUDY
Reverse Mortgage in India.
LOCATION OF STUDY
Delhi
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CHAPTER - 5
DATA ANALYSIS & INTERPRETATION
Q1. Is your home your primary residence?
TABLE - 1
Criteria Frequency Percentage
Yes 36 72%
No 14 28%
. .
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 72% sample of respondents have think that home is
their primary residence, and that 28% sample of respondents don’t think like that.
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Q2. Are all owner and co-owners age 62 or older?
TABLE - 2
Criteria Frequency Percentage
Yes 38 76%
No 12 24%
[
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 76% sample of respondents have all owner and co-
owners age 62 or older, and 24% sample of respondents don’t have like that.
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Q3. Have you considered all financial options before pursuing a Reverse Mortgage
Loan?
TABLE - 3
Criteria Frequency Percentage
Yes 45 90%
No 5 10%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 90% sample of respondents have considered all
financial options before pursuing a Reverse Mortgage Loan, and only 10% sample of
respondents don’t that.
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Q4. Have you consulted with a Loan originator to determine how much you would
qualify a reverse mortgage loan program?
TABLE - 4
Criteria Frequency Percentage
Yes 38 76%
No 12 24%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 76% sample of respondents have you consulted
with a Loan originator to determine how much you would qualify a reverse mortgage loan
program, and only 24% sample of respondents don’t think like that.
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Q5. Will u consult with a certified financial planner to assess what impact a reverse
mortgage could have on any other government benefit you are currently receiving
such as social security?
TABLE - 5
Criteria Frequency Percentage
Yes 33 66%
No 17 34%
ANALYSIS AND INTERPRETATION:
It is evident from the above graph that 66% sample of respondents have consult with a
certified financial planner to assess what impact a reverse mortgage could have on any
other government benefit you are currently receiving such as social security, and 34%
sample of respondents don’t think like that.
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Q6. Did you speak with a tax advisor to determine if there are any tax consequences
to assuming a reverse mortgage?
TABLE - 6
Criteria Frequency Percentage
Yes 41 82%
No 9 18%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 82% sample of respondents think that they were
speak with a tax advisor to determine if there are any tax consequences to assuming a
reverse mortgage, and 18% sample of respondents don’t think like that.
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Q7. Have you discussed the advantages and disadvantages with your heirs?
TABLE - 7
Criteria Frequency Percentage
Yes 50 100%
No 0 0%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 100% sample of respondents think that they were
discussed the advantages and disadvantages with your heirs
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Q8. Have you received counseling from a HUT-Approved Home Equity Conversion
Mortgage (HECM) Counselor?
TABLE - 8
Criteria Frequency Percentage
Yes 48 96%
No 2 4%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 96% sample of respondent you received counseling
from a HUT-Approved Home Equity Conversion Mortgage (HECM) Counselor, and
other 4% sample of respondent don’t think like that.
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Q9. Did you consider any options other than reverse mortgages good for older
peoples?
TABLE - 9
Criteria Frequency Percentage
Yes 28 56%
No 22 44%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 56% sample of respondent consider any options
other than reverse mortgages good for older peoples, and other 44% sample of respondent
don’t agree with it.
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Q10. Did you seek independent legal advice about the loan conditions/contract?
[[
TABLE - 10
Criteria Frequency Percentage
Yes 36 72%
No 14 28%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 72% sample of respondent seeks independent legal
advice about the loan conditions/contract, and other 28% sample of respondent doesn’t
agree with it.
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Q11. Do you think that reverse mortgage is very expensive way of Loan option?
TABLE - 11
Criteria Frequency Percentage
Yes 27 54%
No 23 46%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 54% sample of respondent think that reverse
mortgage is very expensive way of Loan option, and other 46% sample of respondent
don’t think with it.
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Q12. From where did you come to know about Reverse Mortgage?
TABLE - 12
Criteria Frequency Percentage
Electronic Media 15 30%
Print Media 17 34%
Agents 11 22%
Others 7 14%
ANALYSIS AND INTERPRETATION:
It is evident from the above table that 30% sample of respondent come to know about
Reverse Mortgage from Electronic Media, that 34% sample of respondent come to know
about Reverse Mortgage from Print Media, 22% sample of respondent from Agents and
14% sample of respondent know about others sources.
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CHAPTER – 6
FINDINGS AND RECOMMENDATION
FINDINGS:
1. From the outcome of the study that 72% sample of respondents have think that home
is their primary residence, and that 28% sample of respondents don’t think like that.
2. From the outcome of the study that 90% sample of respondents have considered all
financial options before pursuing a Reverse Mortgage Loan and only 10% sample of
respondents don’t that.
3. From the outcome of the study 76% sample of respondents have you consulted with a
Loan originator to determine how much you would qualify a reverse mortgage loan
program, and only 24% sample of respondents don’t think like that.
4. From the outcome of the study it is evident that 66% sample of respondents have
consult with a certified financial planner to assess what impact a reverse mortgage
could have on any other government benefit you are currently receiving such as social
security, and As per the outcome of the study 34% sample of respondents don’t think
like that.
5. As per the outcome of the study 82% sample of respondents think that they were
speak with a tax advisor to determine if there are any tax consequences to assuming a
reverse mortgage, and 18% sample of respondents don’t think like that.
6. Finds that 100% sample of respondents think that they were discussed the advantages
and disadvantages with your heirs.
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7. As per the outcome of the study 96% sample of respondent you received counseling
from a HUT-Approved Home Equity Conversion Mortgage (HECM) Counselor, and
other 4% sample of respondent don’t think like that.
8. As per the outcome 56% sample of respondent consider any options other than
reverse mortgages good for older peoples, and other 44% sample of respondent don’t
agree with it.
9. From the outcome of the study it is evident that 72% sample of respondent seeks
independent legal advice about the loan conditions/contract, and other 28% sample of
respondent doesn’t agree with it.
10. As per the outcome of the study 54% sample of respondent think that reverse
mortgage is very expensive way of Loan option and other 46% sample of respondent
don’t think with it.
11. 30% sample of respondent come to know about Reverse Mortgage from Electronic
Media, that 34% sample of respondent come to know about Reverse Mortgage from
Print Media, 22% sample of respondent from Agents and 14% sample of respondent
know about others sources.
Welfare from Reverse Mortgage
Comparison of welfare provided by reverse mortgage over the last ten years of life with
the option of no Reverse mortgage (selling and renting or buying another house) shows
that a reverse mortgage is a better solution than the other two scenarios considered.
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We perform 20,000 simulations and finally, we calculate the mean and standard error
and confidence intervals of over all the iterations
Across income groups, the welfare gain remains similar, but the difference between the
welfare with and without RM is different. Lower income quartiles seem to benefit more
from the reverse mortgage than higher income quartiles, as has also been shown in
various other studies by Venti and Wise etc. (1991)
Average Welfare for the Highest Income Quartile
0
5
10
15
20
1 2 3 4 5 6 7 8 9
No of Cases
Welfare
Average Welfare for the last ten years of life with RM
Average Welfare for the last ten years of life without RM
Comparison of Welfare Functions
0
5
10
15
20
1 3 5 7 9
11
13
15
17
19
21
Number of cases
Welf
are
Average Welfare in the last ten years of life with RM
Average Welfare in last ten years of life without RM
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Welfare Gains by introducing Reverse Mortgage to smooth consumption fluctuation
Percentile γ = 10 γ = 5 γ =1
100% 0.068 0.039 0.023
70% 0.062 0.034 0.020
50% 0.059 0.028 0.018
30% 0.043 0.019 0.013
10% 0.020 0.012 0.004
Note: Return on Stocks is 10%, bonds is 5%, home appreciation at 10%, personal discount rate of
10%.
Looking at the data, one can conclude that unlocking housing equity does have a
substantial impact on the income levels of individuals. However, there are some
limitations to this study, which are discussed below.
The true cost (ex post) of obtaining funds from a reverse mortgage will depend on the
timing of the borrower’s death—if the borrower lives well past his life expectancy then a
reverse mortgage will have low costs but if he dies sooner than expected then a reverse
mortgage will be expensive.
Average Welfare for Lowest Quartile Income Levels
0
5
10
15
20
1 2 3 4 5 6 7
Number of Cases
Welf
are
Average Welfare in last ten years of life with RM
Average Welfare in last ten years of life with RM
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CHAPTER – 7
CONCLUSION AND SUGGESTIONS
1. Reverse mortgage, if available, offers an attractive option to the elderly to finance
their consumption needs on their own, without the necessity of moving out or
worrying about indebtedness or repayment.
2. If designed properly and offered by an empathetic lender, RM might turn out to be
the vanguard product to build up brand equity for the lender in this niche segment.
Demographic projections indicate that this segment is the fastest growing segment
all over the world.
3. RM, if widely available, might in fact encourage more people in the working
population to increase the proportion of their savings invested in housing.
4. This segment is likely to attract increasingly favorable public policy attention,
given the projected importance of this segment in the electoral politics of all
democratic countries.
5. However, the actual size of the RM markets is nowhere near its estimated
potential, for a variety of reasons from the demand, supply and regulatory
considerations.
6. Any interested RM lender in the Indian market must proceed with caution.
7. The necessary steps before a pilot RM product seem to be the following:
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a. Assessment of potential demand in a limited geographical area through
i. A scientific market survey amongst the specified target segment
ii. Qualitative research to explore borrower concerns and expectations
b. Precise assessment of legal, taxation and regulatory issues related to RM
c. Exploratory financial modeling to assess lender risk and options for
managing it.
Following steps may be taken to make the facility of reverse mortgage workable:
End use of loan should be monitored. An explicit clause preventing use of loan to support
wards’ personal requirements or businesses to be introduced. Interest paid on reverse
mortgage should be explicitly allowed under ‘income from house property’ to give tax
advantage to the borrower. Insurance of credit default such as in the US should be made
mandatory. A small part of the loan amount may be parked in unit linked insurance
schemes so that the premia paid will keep appreciating and at the same time in the
eventuality of death, the sum assured will likely make any good deficit.
Instead of merely capping loan amount as a percentage of value, total outstanding
including interest should be capped if the borrowers survive the term of loan. The
borrower must undertake to pay the difference from his other sources.
A pool account may be operated by NHB or any agency promoted for this purpose which
will meet short recoveries either due to outstanding overtaking the value of property or,
due to value of property falling. Counseling to be mandatory could be free as in the US
and should be done by advisors carrying NHB certificates.
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BIBLIOGRAPHY
1. Patti. Greg (2005), “Reverse Mortgages: Cash for the rest of your life”- Boroson.
Warren (2007), “The Reverse Mortgages Advantages”, Page 237-243.
2. Kelly. Tom (2006), “Reverse Mortgage Formula”.
3. Lowsons. Steve (2005), “Reverse Mortgage Essentials”
4. Bhuyan. Vishal (2007), “Reverse Mortgage and Linked Securities”
5. Muralidharan. D. (2008), “Modern Banking Theory & Practice”
6. Bowen Bishop, T., and H. Shan (2008): "Reverse Mortgage: A Closer Look at HECM
Loans," working paper.
Books:
Business Standard - Lucknow and Meerut Edition
Economic Times - Meerut Edition
Outlook Money - April 2008 Edition
Pratiyogita Darpan - June 2008 Edition
India Insurance Report Series
Industrial Economics Volume 40
Websites:
• www.indiahousing.com
• www.bankbazaar.com
• www.livemint.com
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• www.allahabadbank.com
• www.statebankofindia.com
• www.pnb.co.in
• www.lic.co.in
• www.wikipedia.org
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APPENDIX [
QUESTIONNAIRE
Dear respondent,
I am TAPASYA SHARMA, conducting a survey on “A STUDY OF REVERSE
MORTGAGE SCHEME IN INDIA” Kindly help me in my survey by filling this
questionnaire.
NAME :
AGE :
MARTIAL STATUS :
EDUCATIONAL QUALIFICATION :
ADDRESS :
CONTACT NUMBER :
Q1. Is your home your primary residence?
Yes No
Q2. Are all owner and co-owners age 62 or older?
Yes No
Q3. Have you considered all financial options before pursuing a Reverse? Yes No
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Q4. Have you consulted with a Loan originator to determine how much you would
qualify a reverse mortgage loan program?
Yes No
Q5. Will u consult with a certified financial planner to assess what impact a reverse
mortgage could have on any other government benefit you are currently receiving
such as social security?
Yes No
Q6. Did you speak with a tax advisor to determine if there are any tax consequences
to assuming a reverse mortgage?
Yes No
Q7. Have you discussed the advantages and disadvantages with your heirs?
Yes No
Q8. Have you received counseling from a HUT-Approved Home Equity Conversion
Mortgage (HECM) Counselor?
Yes No
Q9. Did you consider any options other than reverse mortgages good for older
peoples?
Yes No
Q10. Did you seek independent legal advice about the loan conditions/contract?
Yes No
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Q11. Do you think that reverse mortgage is very expensive way of Loan option?
Yes No
Q12. From where did you come to know about Reverse Mortgage?
Electronic Media
Print Media
Agents
Others
********Thank You*********